Peabody Energy: Earnings First Look

At the end of the second quarter, Peabody Energy (NYSE: BTU) was expecting earnings to come in between a loss of $0.16 a share and a profit of $0.09. Earnings from continuing operations came in at $0.06 a share, toward the high-end of the company's range. Cost-cutting and Australian volume gains were the highlights of the quarter.

Not as good as it looksAlthough Peabody earned $0.06 a share from continuing operations, it actually lost a dime a share on a GAAP basis. It earned $0.33 a share on a GAAP basis in the second quarter last year. So the results aren't as good as they may first appear. GAAP earnings in the third quarter of last year were $0.16, with earnings from continuing operations of $0.46.

Clearly, year over year, Peabody is still showing signs of suffering through a difficult coal market. That's not unique in the coal industry, with companies like metallurgical coal focused Walter Energy (NYSE: WLT) cutting its dividend after reworking its debt covenants earlier this year. That company has lost money for four consecutive quarters and should do so again when it reports third quarter earnings later this month. So, on a relative basis, Peabody, despite its current struggles, is doing pretty well.

Rio called itAustralia was a bright spot for Peabody. Rio Tinto (NYSE: RIO) telegraphed continued strength in the Australian market earlier this month when it released its third quarter operational review. This diversified miner noted production growth of 15% at its Aussie thermal coal mines and 5% growth at its semi-soft coking business. A 10% decline in hard coking coal was largely attributed to a wall failure, which Rio is working to correct.

So it isn't surprising that Peabody's coal volume out of the land down under increased about 5% on a year-over-year basis in the third quarter and is up about 10% year to date. While that's the good news, the average price per ton in the second quarter fell from over $101 in 2012 to just under $88—an over 10% drop.

That, however, was better than the volume and price declines experienced in the U.S. market. That said, the U.S. price decline wasn't nearly as material, with average sales prices falling a little over 5%. Peabody's U.S. operations, where coal volumes fell about 3%, remain the bedrock of its business.

Saving moneyThe other area where Peabody was able to show some success was in its cost-cutting efforts. It was able to bring costs down about 3% year over year domestically and 8% in Australia. Clearly, however, that's not enough to overcome the weak pricing environment, even with the slight increase in Aussie volumes.

These trends portent badly for U.S. based Alpha Natural Resources (NYSE: ANR) and Arch Coal (NYSE: ACI) . Both of these industry giants have been having a hard time competing in the export market with Australian coal. And that's on top of a relatively weak U.S. coal market. Without a foothold in Australia, the only thing this pair can do is cut costs to the bone. Look for both to post weak results when they report earnings while trumpeting their cost-savings efforts.

A brighter picturePeabody is painting a brighter picture for the fourth quarter, providing guidance of $0.27 to $0.45 a share. However, that excludes the impact of its recent agreement with Patriot Coal, which will likely push GAAP earnings into the red despite the fact that the agreement is an overall positive for the company.

That said, management highlighted a couple of positive industrywide trends, like utilities continuing to burn down coal inventories as coal regains share from natural gas. These are the real signs of brighter days ahead, suggesting that 2014 will be a much better year for Peabody and the entire coal industry.

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